Last week we executed a trade for larger accounts by selling the ProShares Ultra Short S&P 500 ETF (SDS). For being a half day (mentally) I had a lot of things on my plate and I wanted to get a hike in with Joellyn and our hiking friend (plus all the dogs). Thankfully smart phones make it easier to play hooky for a couple of hours.
We met at the trail head about 50 minutes after the open and as we hiked the market deteriorated into being sort of an ugly day. We ended up placing a limit order that targeted where I thought SDS would be if the SPX hit down 2% on the day and our trade executed around 2:15 EST (it took another couple of basis points to get the exact limit we placed to fill) so relative to the day we got a good price but not the high for the ETF.
There are a few things here. First the price looked good relative to Wednesday but of course if the market tanks on Friday it will not have been a good sale. The logic here is that I think the SPX range has moved up some, not a lot, and after six down days in a row I think the SPX is close to the bottom of the existing range. In addition to simple market action taking it lower from here, some new piece of news could also take it lower but I generally believe the above about the range having moved is my base case.
I've also been consistent in saying that I don't think a revisit of the 2009 lows is a realistic outcome become the newness of the crisis is long gone. We are more in the muddling/slogging phase and have been for awhile which if correct makes SDS a little less important than it was in 2008.
We have a fair bit of cash built up as we made a few sales earlier in the year (these were disclosed as we went) so if the market does drop from here we would look to execute a couple of buys into that drop and still have cash for defensive purposes.
Zooming out a little, after periods where the market goes in one direction for a week (or in this case six days), a lot of extrapolators come on TV to tell us why the trend will continue and it is fascinating how often this sort of extrapolation turns out to be incorrect. Maybe this time will be the exception that proves the rule but if we rally from here then maybe we will put SDS back on--that will depend on whether we get there and the path we take to get there.